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Managing Sustainability in the Oil and Gas Industry

The Oil and Gas industry, by origin depends on limited resources hence behaving in a sustainable way makes a strong business case. However, this has not been the standard rule of conduct until recently. It was until after the 1990’s that Corporate Social Responsibility (CSR) started to take off internationally, companies started behaving in a more responsible way, and began subscribing themselves to sustainability pacts or civil society-led voluntary regulation across a range of issues. In particular, we’ve seen companies like Shell committing themselves to the protocol of Kyoto and agreeing to reduce their carbon emissions to 1990 levels by 2010. Furthermore, by 1995 Shell proved to be an initial leader, by including references to sustainability and human rights in its 1970’s Company Principles. After many major energy companies followed suit, the industry has come to draft its own codes of conduct and aligned them with governmental and international policies such as the EU’s Renewables Directive.

The nature of oil and gas operations involves many potential negative environmental effects, particularly during exploration and production, including land clearance, oil spills and natural gas emissions. Environmental risks of oil and gas operations are heightened because oil and gas deposits are often located in developing economies near areas of high biological diversity and high ecological vulnerability,

About half of the world’s known oil and gas reserves are controlled by just five national oil companies in the Middle East - Saudi Aramco, Kuwait Petroleum, the National Iranian Oil Company, Sonatrach of Algeria and the Abu Dhabi National Oil and six out of the world’s ten largest oil and gas producing companies are state-owned.

The International Energy Agency predicts that in 2035 oil and gas will meet around half of the world’s energy needs – slightly down from current levels – with oil and gas remaining the largest contributors to the energy mix. Energy in general – and oil and gas in particular – help to meet basic human needs, such as food and shelter. Oil and gas also contribute to social development by improving education and public health. Access to affordable and reliable energy is fundamental to reducing poverty and improving health, increasing productivity, enhancing competitiveness and promoting economic growth. None of the Millennium Development Goals can be met without the discovery, production and supply of energy in the form of oil and gas.

Nowadays, several oil companies are closely associated with high profile CSR institutions, such as Stock Market Sustainability or ethical indexes, the UN Global Compact, and the Global Reporting Initiative. It is important to stress that the requirements to qualify for these indexes are higher for ‘high impact’ industries, such as oil. To get considered, oil companies have to have environmental management systems and stakeholder consultations in different countries, among other social and environmental measures.

Access to Finance

Energy is the single most important enabler of economic development. However, its production and consumption is associated with social and environmental problems and has thus received criticism from Non Governmental Organizations (NGOs), environmentalists and civil society groups. A number of events in recent years have brought issues of environmental and social concern in project financing to the forefront of public discussion. Such events range from the Brent Spar incident in the North Sea, to the environmental pollution from oil spills in the Niger Delta of Nigeria, to the social displacement caused by the BTC pipeline project in Azerbaijan to the flooding caused by some dam projects. Such change in public opinion has had a marked effect on the lenders and sponsors of energy projects because it has heightened their own reputation risk and subjected them to questioning with respect to their “social license” to operate.

By way of example, the Brent spar incident led to campaigns which promoted the boycotting of Shell’s shares in the capital markets. In addition, the risks posed to personnel and energy facilities from gas pipelines to oil platforms has become evident - the kidnapping of oil industry personnel and the blowing up of pipelines in Nigeria in recent months has been attributed to the environmental degradation and neglect of the oil producing communities in the country.

Events such as these have undoubtedly caused a loss of revenue to both government and International Oil Companies (IOCs) and has affected their ability to honor contractual obligations which are predicated on uninterrupted supply of oil. There is also no doubt that where these projects are financed by project lenders, the disruption of the cash flow occasioned by these environmental and social risks will affect the loan repayment schedule and interest. This means that where the environmental and social risks of a project are high, lenders might be reluctant to finance it.

Managing Impact Within a Cleaner Energy and Global environment

Part of these shifts in paradigms is that the energy industry is looking into different sources apart from oil and gas in a way to make business in a more sustainable and long-term fashion. To take the United Kingdom as an example, despite increasing its drilling activities, the country’s production of petroleum oil and natural gas is in decline. According to a Key Note report of 2013, between 2008 and 2012, production of oil and gas fell by 40.2% in that country. This decline came as part of the British Government’s focus on greener and more sustainable electricity generation methods, among others. Even if Natural Gas produces less carbon dioxide than oil and coal (almost half the emissions than coal according to the United Kingdom Environmental Protection Agency) the EU’s Renewable Directive set a target for the UK to achieve 15% of its energy consumption from renewable sources by 2020.

Globalization

Globalization is another factor impacting the way the industry is operating and making business. Globalizing processes, supply chains, and climate impact has forced, Corporate Responsibility Departments worldwide to widen their boundaries of action. Companies are realizing that the impact of their activities is broadening, forcing them to consider the international supply chain and environmental risks globally, and as a result, they are drafting new CSR policies within the following parameters:

- New programs that focus on the environmental risks within the supply chain

For these new actions to be successful in an interconnected and interdependent world, the way to apply them needs to change. Legitimate efforts are embedding multi-layered collaboration, partnerships and social learning.Along the line of forming partnerships to deliver a proper impact, we shall see more Non-Governmental Organizations (NGO’s) not only seeking to influence project development but also representing opportunities for positive interactions and partnerships. NGO’s have experience and expertise in identifying, evaluating and addressing social issues as well as influencing public opinion through information campaigns.

Furthermore, in order to implement good practices along the supply chain, contractors are playing a growing role. For major projects they are responsible for employing people, providing housing, food and health care, as well as engaging in most local purchasing, developing local businesses. Even when labour unrest appears, contractors can manage them in a more comprehensive way.

Multiple avenues to achieve this multilayer collaboration and close follow up of the impact involves activities such as:

- Obtaining early buy-in and commitment from the government and local communities

- Establishing a company foundation

- Promoting sustainability

- Sound KPI’s

Social & Environmental Accountability

With new regulations coming up, protocols and codes of conduct within the industry, how are energy companies managing their impact and demonstrating social and environmental accountability?

As a practical approach to the previous scenery, companies have incurred in different practices. In the social arena, the Global Sullivan Principles and the Voluntary Principles on Security and Human Rights are particularly relevant to the oil industry. The latter were developed by the International Business Leaders Forum in 2000 and refer to issues that should be considered in risk assessments. These agreements also present guidelines on working with public security organizations and contracting private security firms and have been signed by 16 oil corporations, including most of the larger companies.

As a result of the subscription to these agreements, the industry is tackling the following issues by including them in their own codes of conduct:

• General Policy

• Wages and benefits (Considering skills shortage in the sector)

• Hours of Work

• Training and Education

• Free association and collective bargaining

• Forced labour

• Child labour

• Discrimination, moral and sexual harassment

In terms of meeting the infrastructure gaps along the countries in which the industry operates, the World Bank estimates that the total demand for infrastructure investment and maintenance from developing countries is over $900 billion annually. In terms of logistics, these efforts require attention on the role of the private sector, regional disparities in infrastructure service delivery, rapidly growing demand for infrastructure in urbanizing economies, affordability and the need to support and build upon technological advances. Additionally, the World Bank’s Sustainable Infrastructure Plan, stresses that there is a need to embed sustainability in infrastructure services going beyond “do-no-harm” objectives.

Oil and Gas major players have undertaken different actions to apply rules of conduct, policies and impact mitigating measures. However, as a general rule, the types of impact and applicability of their activities vary depending on the scale and type of project as well as the life-cycle stage of the company and the project.

Finally, non-committed actors who are blamed to be green washing their reports have been increasingly put in the spotlight amidst the growth in legitimate efforts to tackle issues that will eventually affect all the industry. However, revealing these activities have been useful for the industry for maintaining the spot- light on malpractice and countering attempts to deflect opposition through tokenism, advertising and public relations. Long-term climate planning and social strategic planning are key to allow industry companies to pivot and adapt to the challenges being put forward to keep producing in a sustainable way.

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